Donald Trump And The “F” Word

If there’s one belief that enjoys broad, bipartisan support, it is that the U.S. faces a debt crisis. Democrats and Republicans routinely bemoan America’s irresponsibility and immorality by claiming it is borrowing from the “bank of China” and leaving that debt for our children and grandchildren to repay. Donald Trump threatens to challenge that paradigm by aggressively using the “f” word.

Donald Trump

Through his proposed $1 trillion infrastructure plan, to be spent over 10 years, along with other economic policies, Trump is tossing aside the notion that the federal government could face bankruptcy or an inability to service its debt. The question is how much stimulus we can afford.

Stephanie Kelton provided answers to that question as part of a panel discussion at the Harvard Law School on December 2. She is a professor at the University of Missouri in Kansas City, and previously was the economic advisor to Bernie Sanders and to the Democrats serving on the Senate Budget Committee.

Kelton spoke only about Trump’s economic agenda and did not discuss (or endorse) any of his other proposals.

Deficits exploded after the financial crisis, Kelton said, and it quickly became a core topic of conversation, particularly as Spain, Greece, Ireland and other European countries experienced crises. Fiscal policy was not an option in the U.S. because of the perceived debt crisis, and our only tools were monetary policy and the Fed, she said. The Fed did what it could, starting with interest rate cuts before turning to unconventional methods like quantitative easing, buying mortgage-backed securities and Treasury bonds, with the hope of driving down rates and creating consumer demand. It used “forward guidance” to encourage investors to take positions that would stimulate growth.

But none of this created the economic expansion that was needed. Since the financial crisis, GDP growth has averaged less than 2%.

Ben Bernanke asked for help in the tentative language that Fed chairs are accustomed to using. In 2012 in testimony before Congress, he said “monetary policy is not a panacea and not the ideal tool.” He was saying, according to Kelton, that Congress needs to reach for the other lever – fiscal policy. She did not criticize his language, but one could rightfully ask why Bernanke didn’t pound his fists and plead directly for the policy actions that he knew were necessary to revive growth.

“Now there is a new sheriff in town,” Kelton said, who is ready to pull the fiscal-policy lever.

Trump gets it

One needn’t look far to see the prevailing wisdom regarding fiscal deficits. Consider this commentary, What Should Trump Do?, by the highly respected analyst John Mauldin. Mauldin cites 160 instances of major countries “having to renegotiate their bonds because they had too much debt” and states that many of those incidents resulted in financial crises.

But the U.S. can never face such a crisis. Trump grasped this point and spoke about it in an interview with Maria Bartiromo in May. “This is the United States government,” he said. “First of all, you never have to default because you print the money. I hate to tell you. So there’s never a default.”

People went crazy when Trump made that statement, Kelton said. The Wall Street Journal editorialized that Trump could not be trusted with the nuclear codes, much less with handling the federal debt.

But, as Kelton pointed out, Trump is far from the first person to acknowledge that the U.S. cannot face insolvency. That point has been made by Warren Buffett and Alan Greenspan, among others.

Trump, Buffett and Greenspan are correct, according to Kelton. Too much debt could have its consequences, but it is not a financial crisis along the lines of what Greece and other countries have faced. As a sovereign nation with complete control over its currency, the U.S. will always make good on its debts, on time and in full – and that includes its Social Security, Medicare and other entitlement obligations.

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